A Major Departure from Service Contracts
India has cut import of oil from Iran by 26.5 per cent in the year that ended
on 31 March to comply with EU and U.S. sanctions, The Hindu reported.
The production-sharing offer is a major departure for Iran which has
traditionally offered service contract to foreign oil companies, giving them a
pre-fixed rate of return for their investments in exploring and producing oil. A
production-sharing contract will give the foreign oil company the ownership of
the oil explored and produced and the freedom to ship it wherever they desire.
Could anyone highlight the good and negative aspects of this development?
ReplyDeleteHistorically, Iran has opposed production-sharing agreements, believing it was unconstitutional as the country’s constitution specifically defines underground wealth, including oil, as belonging to the government, and not wanting to grant foreign oil companies the “ownership” of oil that has been extracted from the ground. That’s been the constitutional argument ever since Iran nationalized its oil industry during the Mossadeq government in 1951.
DeleteInstead, as part of their bids to win exploration and exploitation licenses to a particular oil or gas field, the foreign companies agree to make the initial investment which could be very substantial and highly risky, and receive the return on their investment at a fixed interest rate after the exploration is over and they start the exploration phase. They then technically “deliver” the oil they have found to the government, and the government in turn sells it back to them, a buyback arrangement, at a certain percentage discount over the market price at the day of oil shipment.
Foreign companies have been reluctant lately to continue with the arrangement, arguing that investing in Iran oil industry is risky to begin with, and they do not want to enter into a very complicated contract and assume further risks of exploration if no or not much oil is found.
With production-sharing agreement, the two sides assume risks during the exploration phase and costs associated with exploration and exploitation phases. The oil will then become the property of the foreign company and, based on their particular contract, they pay the government a certain percentage discounted price under the market on the shipment day. They also can ship the oil anywhere they desire (previously Iran had the say where the oil would go).
Iran is probably thinking that it needs to back off from its historical position in order to attract foreign investors for its oil sector, something that has become a rarity under the current sanctions. It is doubtful however that many companies jump on the opportunity, fearing their act would subject them to severe sanctions. Iran might have given up a constitutional right, if the Hindu’s report is confirmed, but not many new investors might be found. It’s more a sign of desperation.
Thanks Nader jan for explaining the development and for the quick analysis.
DeleteIn other words the regime is doing what the Qajars used to do with Iran's resources.By giving it away to the lowest bidder for the survival of the regime and detriment to Iran's interests.This is a very sad day indeed.
ReplyDeleteThat is a very juvenile view of the situation as usual. The fact is that Iran is diversifying its economy and trade including rationalizing the energy markets. A very good and objective analysis is in the 2013 edition of Business Year magazine that is not based on rants or hyperbole:
DeleteNon-oil trade volumes exceeded $47 billion in the six months from March 2012, with $20.5 billion in exports and $16.5 billion in imports. Oil exports, however, fell from 2.2 million barrels per day (bbl/d) at end-2011 to 1 million bbl/d in September 2012. Falling demand from Europe, which currently buys around 800,000 bbl/d from Iran, is mostly to blame, yet increased demand from members of the Non-Aligned Movement (NAM), a 120-member organization of which Iran is a part, is likely to replace lost demand in the medium term. Current non-oil trade with NAM members stands at $43 billion, including $19 billion in exports and $24 billion in imports. Trade with China also reached $40 billion by the end of 2011, and links with the Asian giant are likely to go a long way to seeing an increased number of oil tankers, the insurance of which has recently been taken up by local insurers. The authorities are additionally looking to further mechanize and irrigate Iran’s countryside in a bid to boost agricultural production. Already a major producer, the sector accounts for 10% of GDP, 26% of non-oil exports, and 80% of domestically consumed foodstuffs. Under the fifth FYDP, $15 billion is to be transferred to the Agriculture Sector Development Plan, with the industry’s large workforce in mind—20% of the country’s labor force is currently engaged in agriculture.
After GDP growth of 7.3% in 2010, a slowdown into 2011 to 5% is mainly attributable to hydrocarbon export routes shifting away from Europe. While a high price of oil per barrel has kept things ticking along in Iran, it is solidifying trade ties with partners in South America and Asia, especially China, which will lead to future export growth.
http://www.thebusinessyear.com/publication/overview/15/iran-2013
@ 12:23 AM and 12:08 AM,
DeleteI thought we were discussing the merits of each of the two typed of oil contracts. Unless I am missing something in your comments, would you also comment on the discussion about the post.
@Anon 12:23 AM...Go and tell your propaganda nonsense to your IRI Groupie lovelies at the local coffee shop.
DeleteAnonymous May 5, 2013 at 10:41 AM
DeleteSo the thebusinessyear.com is now part of irans propaganda machine,just because you find the truth unpalatable does not make it any less true,as for the production sharing this is iran doing what it has to with all the tools it has to fight the economic war forced on it,as for whether it is out of desperation or whether it will be successful or not only time will tell,personally I would imagine that there will always be some takers both for the profits and in the case of nations like china the furtherance of its energy security
Iran exported nearly 8.7 million barrels of fuel oil in April, or about 300,000 barrels per day (bpd), an increase of more than five-fold from a year-ago, according to traders and data from Thomson Reuters Oil Analytics.
ReplyDeleteI am truely disgusted by this but what is even more disgusting is the way regime fanboys always try to talk things like this right.
ReplyDeleteAnonymous May 5, 2013 at 6:52 AM
ReplyDeleteAs opposed to professional malcontents like yourself who denigrate anything the iri does